86 Energy Project Financing: Resources and Strategies for Success
In 1995-96 we had the privilege of working with the City and
County of San Francisco on its “Kilowatts to Megawatts” research and
development project funded by the Urban Consortium. A key com-
ponent of this effort, ably led by Mr. John Deakin and Ms. Christine
Vance, was to develop a decision model to aid other cities and coun-
ties in determining when to use their limited financial resources to do
energy efficiency work, when to outsource the work, and which of the
many outsourcing options would best meet the municipalities’ needs. A
particularly challenging aspect of this work was the identification of spe-
cific risks associated with a broad range of energy efficiency financing
opportunities and the extent of those risks. Table 4-1 offers the general
magnitude of those risks by option. Clearly, the specific magnitude of
these risks will vary with the customer’s local conditions.
Risk shedding always carries a price tag. It can be presumed,
therefore, that the customer will typically pay more for the services
provided on the right side of Table 4-1. It should be noted, however,
that, as the customer moves to the more comprehensive option, he, or
she, also receives more services, has less administrative burden, and will
probably achieve greater savings persistence. The costs associated with
the “right-hand side of the menu” can also be mitigated by controlling
the contributing factors listed. The greatest factor, however, could be the
relative speed with which projects can be implemented, thus avoiding
valuable dollars going up the smokestack while the customer tries to
get more of the energy efficiency work out of his or her organization’s
limited resources. (Options are shown on the left in the table.)
In performance contracting, the risks shed by the owner are largely
assumed by the ESCO. Effective performance contracting then becomes
a matter of risk assessment and management by the ESCO. The more
accurately the ESCO assesses the risks and the more effectively it man-
ages them, the greater the benefits to all parties. Since performance
contracting risks are primarily managed through the project’s financial
structure, effective risk management presents a major point of differen-
tiation among ESCOs.ESCO RISK ASSESSMENT AND MANAGEMENTEffective, experienced ESCOs have found a series of critical risk
assessment components and management techniques, which include: